posted on 17 July 2016
-- this post authored by Archana Pradhan
Often, young households have less credit history (and sometimes no credit history), limited savings, and lower levels of income because they are just beginning their working careers. In contrast, households near or in retirement generally have an extensive credit history, more savings, but may have a limited fixed income if already in retirement.
These trends are borne out when comparing the credit risk attributes of new mortgage loan applicants by age. Millennial applicants have the lowest credit scores when compared with older cohorts. The average credit score for Millennials applying for a mortgage loan in the last three months (March, April, and May) was 730 compared to 738 for Generation Xers, 753 for Baby Boomers, and 770 for the Silent Generation (Figure 1). Compared to other cohorts, Millennials have had less time to build their credit history.
Millennials have the highest loan-to-value (LTV) ratios and debt-payment-to-income (DTI) ratios. The average LTV ratio for Millennials applying for a mortgage loan in the last three months was 89 percent compared to 81 percent for Generation Xers, 73 percent for Baby Boomers, and 68 percent for members of the Silent Generation. Millennials are short of savings, often have student or other debt, and are early in their working careers (hence, have lower earnings than more experienced workers). Since many of them do not have enough savings for down payments, their LTV is higher compared to other cohorts.
The average credit score for mortgage applications with two borrowers was higher than single-borrower applications for all generations (Figure 2). For Millennials, the average credit score for single-borrower applications was 722 compared to 735 for joint applications.
Similarly, LTV and DTI ratios for joint (two borrowers) mortgage applications were lower than single-borrower applications for all generations (Figure 3 and Figure 4). The LTV gap between joint applications and single-borrower applications was wider for Generation Xers and Baby Boomers than for Millennials and the Silent Generation. For Millennials, the average DTI ratio for single-borrower applications was 37 percent compared to 35 percent for joint applications (which generally include income from at least two wage earners). The DTI gap between joint applications and single-borrower applications was wider for Millennials and Generation Xers than for Baby Boomers and members of the Silent Generation.
Workers who are early in their working careers, such as today's Millennials, generally experience more rapid earnings growth than older workers, and more rapid income growth than retired individuals. While their credit-risk attributes may look weaker than for older cohorts, this potential for faster earnings growth and more savings accumulation are important offsets in their risk profile.
1 Only first-lien applications were used for this study from the CoreLogic Loan Application Database.
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